CIS is not a separate tax on construction. It is your own income tax and National Insurance, taken off early, by whoever pays you.
Once that lands, most of the confusion around it goes away.
How the money actually moves
A contractor pays a subcontractor for construction work. Before handing over the money they take 20% off the labour element and send it to HMRC with the subcontractor’s name attached.
The subcontractor gets 80% now. The other 20% sits with HMRC as a credit against the tax bill they were going to have anyway, and gets set off or refunded later.
So nobody pays more tax because of CIS. They pay it sooner, and they have to go and get the difference back.
The rates
| Status | Deducted from labour |
|---|---|
| Registered and verified | 20% |
| Not registered, or not matched on verification | 30% |
| Gross payment status | Nothing |
The deduction is on labour, not materials. Materials the subcontractor bought and paid for come out of the calculation first, at cost, excluding VAT if they are VAT registered. Getting that split wrong is the most common CIS error there is.
Who is in the scheme
Contractors are anyone who pays subcontractors for construction work. Registration is compulsory, before the first payment.
Subcontractors are anyone paid for construction work. Registering is optional, but not registering costs you 10% of every invoice.
Plenty of businesses are both at once. A firm taking work from a main contractor and putting its own subbies on site is a subcontractor coming in and a contractor going out, and registers separately for each. There is more on that in do I need to register for CIS.
The one nobody expects
A business that has nothing to do with construction gets pulled in as a contractor if it spends more than £3 million on construction operations in the previous 12 months.
That catches property owners, large retailers, manufacturers doing a site expansion and housing associations. It is a rolling check, so a business can cross the line mid year without anybody in finance noticing, and then has 90 days to register.
What counts as construction work
Wider than most people assume. Groundworks, installation, alterations, repairs, demolition, decorating, and installing systems like heating, lighting, power, ventilation and drainage.
What sits outside:
- Architecture and surveying
- Delivering materials, where the supplier does no installation
- Carpet fitting
- Making or delivering plant and machinery on site
- Work clearly not construction, such as running a site canteen or providing security
- Professional consultancy
Where a single contract covers both, the whole contract is usually inside the scheme. Splitting an invoice to keep part of it out is not a decision to take on your own.
Whether your own trade is in or out is not always obvious, so we have written it up trade by trade across the 45 trades we work with.
What a contractor has to do, every month
- Verify every subcontractor before the first payment
- Deduct at the rate HMRC gives back, on labour only
- File the monthly return by the 19th
- Pay the deductions over by the 22nd if paying electronically
- Issue a payment and deduction statement to each subcontractor within 14 days of the tax month end
A month with no payments still needs a nil return, or you tell HMRC you are inactive for up to six months. Doing neither is a £100 penalty.
What a subcontractor has to do
Register, keep every deduction statement, and reclaim what has been taken.
How you reclaim depends on your structure and the two routes have almost nothing in common. A limited company offsets it against PAYE monthly through the payroll. A sole trader claims it through Self Assessment after the year end. We cover both in getting your CIS deductions back.
Where it usually goes wrong
- Paying a subcontractor before verifying them, then guessing the rate
- Deducting on the full invoice instead of the labour element
- Missing the 19th, which also breaks the compliance test for gross payment status
- Never reconciling CIS suffered against what HMRC actually holds, so money stays unclaimed
If you would rather it was handled
Construction is the only sector we work in. CIS runs monthly, on time, with the materials split right and the deductions reconciled rather than assumed.
Have a look at how we handle CIS or book a call.